Tuesday, February 20, 2007

Strategy and CO2 Emission Targets

Here's an interesting move in the strategic "game" that the US and the EU are playing regarding greenhouse gas emission targets. From the AP:

BRUSSELS, Belgium - European Union environment ministers said Tuesday they would cut overall carbon dioxide emissions 20 percent from 1990 levels by the year 2020, adding that they were ready to go to 30 percent if other industrialized nations matched their efforts.

The reason I call this a "game" is because that's what economists call all sorts of strategic interactions... which is just a way of describing interactions where what one party does affects the decisions of the other party.

At any rate, I find it very interesting that the EU is willing to cut emissions by 30 percent, but only if the US does too. After all, if they really cared about the environment, wouldn't they just volunteer to cut to 30 in the first place? What's the explanation?

I think there's a pretty good one, actually. First of all, let's start with the presumption that the EU wants to curb greenhouse gas emissions. But they know that their own emissions are only part of the problem. Coupled with that is the concern that curbing CO2 emissions might be expensive, and reduce international competitiveness. So if they cut their emissions and no one else does, they have to pay a competitiveness price for their emission cuts in addition to the direct costs of curbing their emissions.

Given all of that, it's very sensible for them to propose what they did. On the one hand, their proposal provides an incentive for other countries to cut their emissions, in the same way that a matching gift during a pledge drive does. (Think "if you give right now, your gift will be matched dollar-for-dollar by a matching pledge, effectively doubling the value of your gift!")

But at the same time, their proposal makes good financial sense for the EU, because the more that other countries (e.g. the US) agree to cut emissions - and more importantly, the more they agree to pay the costs of cutting those emissions - the less the competitiveness penalty that the EU will pay for cutting their own emissions, which means that cutting emissions by any given amount is cheaper for the EU.

So all in all, I like this strategy by the EU toward cutting emissions. Of course, whether the incentive is sufficient to encourage the White House to agree to any emissions target is another question altogether...

Contact

The Street Light is written by economist Kash Mansori, who works as an economic consultant (though views expressed here are entirely his own), writes whenever he can in his spare time, and teaches a bit here and there. You can contact him by writing to the gmail account streetlightblog. (More about Kash.)